TAXING CORPORATE INCOME Review of paper and Comments by Jack Mintz

Main Points of Paper Meade report considered three forms of rent taxes on corporations - R, R+F and S bases Authors focus on two main issues How economies have changed since 1978 affecting corporate tax policy (source vs residence base taxation) Examine different tax systems with emphasis on “what to be taxed” and “where to tax it”

Background UK corporate tax system generally move to income base with lower rates and broader bases since 1978 ECJ cases affected ACT, treatment of outbound and inbound investment Around world -- today compared to 30 years ago falling general statutory tax rates (48% to 28%) CIT revenues have been buoyant as a share of GDP across OECD countries falling importance of manufacturing and rising importance of services, some tradable like financial (and business services). (greater use of profit-insensitive taxes on businesses)

WHAT HAS CHANGED Globalization of economic activity Tax competition -- for capital or profits? statutory rates -- income shifting and acquire rents Financial innovations and debt vs equity distinction Relationship of PIT and CIT residence of owners vs residence of corporation influence of PIT on investment Organizational form -- choice at small business level (but also within corporate groups)

Role of Corporate Tax Backstop to personal tax (withholding for residence tax) Taxing foreign income (source -- crediting) Rent tax (source role) (Surrogate benefit tax-- source role)

Alternative Tax Bases Source-based Residence-based Tax on return to equity (problems of attribution to jurisdiction) formula apportionment Corporate flow of funds (R, R+F, S bases) Allowance for corporate equity (Croatia, Belgium) Comprehensive Business Income Tax Dual Income taxes (schedular, lower tax on capital income, CIT) Business value taxes (Michigan, Italy, Hungary) Residence-based Shareholder tax on accrued worldwide profit (problem of tracking) Residence-base corporate tax on accrued worldwide profit Destination-based tax Corporate cash flow tax (VAT with wage deduction) Destination-based income tax (income-based VAT)

Comments Emphasis on globalization is important but many issues with corporate tax are also domestic. treatment of capital gains -- payout, investment, income stripping, (relevance to withholding role) treatment of losses (constraint -- loss-dumping in a jurisdiction) financial derivatives -- differential tax rates on capital gains versus other income (dividends) role of tax-exempts (pension plans, charities, non-for-profit)-- recent private equity acquisitions with debt consolidation -- corporate group membership organizational structures - limited partnerships, special purpose entites, public-traded trusts or partnerships. small versus large business taxation (tax planning)

Comments But globalization magnifies many problems with international tax arbitrage dual residency problems (double deductions) multiple dip deductions through indirect financing (conduit) structures (interest and leasing) financial derivatives and withholding taxes

Comments: Corporate Tax Incidence Who pays corporate tax? Importance to evaluating its purpose Large public corporations (source, rent role?) Foreign-owned (tax crediting) Small business (withholding role) Large private corporations (withholding role) Plea for research

Evaluation of UK System Impact of corporate tax on efficiency (intertemporal, interasset, interindustry, organizational choice distortions) Influence on FDI -- outbound and inbound Impact on distribution of incomes

Meade Report Recommendations Did Meade report business tax recommendations fail? Any role in UK corporate tax (seems little) Has played some role elsewhere Cash flow taxes in resource sector to tax rents (Australia, Canada) ACE systems in some countries VAT systems -- move to consumption base, treatment of financial flows, VAT as substitute for income tax revenues

COMMENTS What do we do? No tax base seems satisfactory - rather depressing Corporate tax revenues still pretty strong -- maybe muddling through makes sense Alternative approaches to future to stem tax rate cutting Worldwide co-operation -- transfer prices, some global apportionment (EU discussions) New approaches to taxing businesses profit-insensitive taxes, user fees interest deduction elimination, comprehensive BIT, BVT